Negative Income Tax
02 January 2005
Posted by: Author: Azhar Moola
Negative Income Tax
In South Africa the vast disparities of wealth between the rich and poor has resulted in many social problems.The growing rate of unemployment and the sense of hopelessness among people living below the bread line have resulted in social problems such as crime getting out of hand.
Government has tried to implement strategies to eradicate poverty. A possible solution to this problem could be the implementation of negative income tax.A tax is negative when the government pays the taxpayer instead of the other way round.It is a government policy tool designed to increase progressivity in the income tax system and combat poverty by making taxes negative at very low income levels.
Taxes on income can be classified into three categories ; progressive ,proportional and regressive tax.Progressive tax describes the situation where the higher a taxpayer’s income is the greater the percentage of tax is to the income.Proportional tax takes a constant percentage of income at all levels and Regressive tax is where the higher a taxpayer’s income is the lesser the percentage of the tax is to the income.Therefore,a negative income tax will result in the tax system becoming more progressive.
A basic illustration of a negative income tax will start with the underlying belief that a family of a given size should be allowed a minimum annual income.The aim is to guarantee this income without eliminating the incentive to become self-supporting.
This is achieved by combining a grant with a tax.An example would be to guarantee each household R6 000-00 per year.For each rand earned after that the household loses R0-50.Accordingly the marginal tax rate on the grant is 50%. At R12 000-00 the household breaks even, this being the amount at which it receives,the family is paid by the government, it pays a negative tax.Above this level it pays a positive tax .
Supporters of a negative income tax system believe that it would be a particular effective tool for reducing poverty.It provides a minimum level of income as a matter of right, not of charity, and it does so without removing the incentive to work from those who benefit from the payments.As a replacement to other welfare programs it alleviates the problem of exceptions that are involved in most welfare programs and it alleviates the most pressing cases of poverty.
In many federal jurisdictions it removes whatever incentive people might have to move to provinces with better welfare programs, but it does not hinder movement to places where work may be available.
The crucial question is whether a negative income tax system would work in South Africa.The answer may lie in making the minimum annual amount just high enough for a family to survive.Thereby creating the need to work and earn more and thereby resulting in less people totally.
Source: By Azhar Moola (TaxTALK)